Coping with virtual profits

REBECCA EISENBERG

Published 4:00 am, Sunday, November 30, 1997

Money, unlike bandwidth, does not come from the sky. And business - Internet-based or not - rarely strays far from old-fashioned principles of profit and loss. Thus when businesses built on digital dreams start morphing into financial fiascoes, it should not come as a shock - yet somehow, it does.

Just last week, for example, Wired Ventures - you know the one: that San Francisco-based, Internet-oriented publishing company - laid off 20 percent of its work force, the hatchet landing most directly on its on-line division, Wired Digital.

According to the company, Wired chose to lay waste to much of the on-line division because that was the part of the company that was losing money, while the print division, which publishes Wired Magazine, was making a profit.

Although commonsensical to the business-savvy world, Wired's layoffs created a stir amongst the idealistic technophiles on-line. Mailing lists buzzed with serious discussion of whether the Wired layoffs signaled a death-knell for the financing of other on-line publishing ventures and the beginning of the end for the hopes of other Internet start-ups.

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Even sister on-line publications like Salon wrote articles detailing conspiracy theories of power struggles at Wired Digital that led to selective layoffs, rather than sticking to the real, albeit more boring, story about Wired's long overdue focus on its bottom line.

Wired - and any tech-related company for that matter - is no different from any other business and layoffs at Wired should signal no apocalypse. But rumors now abound that layoffs are coming at C / NET as well. The truth is, Net companies have always disappeared almost as quickly as they have arisen, from American Cybercast, maker of famous Web-episodics like "The Spot," to GNN.

Hipster (or wannabe hipster) Web publications, like St!m, SPIV and Salvo have seen their funding pulled; Internet-related TV shows like "The Site" have been cancelled; and companies like Netsource and Electric Minds have been bought out. It's a new industry, and thus is high-risk.

Whether Net-based or not, a company will only make money if it has a service or product to sell - to either consumers or advertisers. In Wired's case, its on-line division, consisting mostly of wide-eyed diatribes and cool-but-free search engines, was not generating enough ad revenue to cover its costs. And although Wired built a cutting-edge Java-based chat interface - perhaps the first of its kind - "neat" technology doesn't cut it if advertisers still don't care.

Wired likes to call itself a "high-technology" company: it employs a large number of engineers and calls its editors "producers." But it is a magazine, not a software manufacturer. The company seems to be learning this, albeit very slowly. Even so, it laid off far fewer engineers than it did Internet writers. In a way, you can't blame them, engineers make the magic stuff, the fun search engines and the zippy Web tools. But gee-whiz technology alone won't help you meet payroll.

"Why Wired?" (former) CEO Louis Rossetto explained in the debut issue of his magazine back in 1993. "Because the Digital Revolution is whipping through our lives like a Bengali typhoon - while the mainstream media is still groping for the snooze button. . . . Wired is about the most powerful people on the planet today - the Digital Generation. These are the people who not only foresaw how the merger of computers, telecommunications and the media is transforming life at the cusp of the new millennium, they are making it happen."

Maybe Rossetto will be right someday, but not today. Almost five years later, the only product that has brought him profit has been sold on old-fashioned paper.

Internet start-ups must come down to earth. Many of them spend money as if they were software companies, even when they have no product to sell. Then they act surprised when they can't sell Web advertising at television rates.

The truth is the Web is still very much a niche market. Even though the on-line population might be wealthier and bigger spenders than the TV consumer market, it is still a small market segment - and one that remains untested.

A couple of years ago I was approached by the CEO of a (now defunct) Internet start-up and asked to read his company's business plan. It talked about suburbanization, isolation and how the Internet brings us together.

"But how is it going to make money?" I asked. His answer was murky. I then attempted to rewrite it from scratch, focusing on the promised return-on-investment. The CEO was not impressed, and neither were the then-employees, who all preferred to focus on the cool things that the Net can do for us. The company never received further financing, and most of the employees were never paid. Sometimes it takes the experience of making a huge mistake to learn a huge lesson. The Internet is cool - but so is paying your staff.

So remember, if it sounds too good to be true, it most likely is. Make-believe companies still only generate make-believe money.&lt;

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